Investment Management Assignment Below is your assignment for this subject. Please read the brief and instructions thoroughly. o Write a report which addresses the questions (a to f) below. Where relevant, base your analysis on analysis of the data in the asset return table provided. a. Describe each of the asset classes, setting out their characteristics and risks. b. Calculate the AM (Arithmetic Mean) and GM (Geometric Mean) measures of the average annual yield on each of these asset classes during the period 1983-2003. Contrast the resulting measures of average yield for each asset class. c. What would be the main problems you would encounter if you tried using the efficient frontier you have identified for portfolio selection purposes? d. How does foreign exchange risk contribute to the risk of international investments? Is it worthwhile to hedge exchange rate risk? e. During a world financial crisis, all the major financial markets will usually move in the similar direction (i.e. become highly correlated). Do you think this will limit the benefits of international diversification? f. It is often said that Australian investors have an inefficient home bias in their asset portfolios. What does this mean? Why is it important? What are the principal causes of “home bias”? Asset returns on different asset classes over the period 1983 to 2003 Year Australian Shares % return Australian Bonds % return Cash % return International Shares % return Listed Property Trusts % return 1983 66.8 14.3 11.1 32.8 50.2 1984 -2.3 12.0 10.9 14.0 10.1 1985 44.1 8.1 15.2 70.2 5.3 1986 52.2 18.9 15.6 45.6 35.4 1987 -7.9 18.6 12.8 6.5 5.8 1988 17.9 9.4 12.9 4.3 16.1 1989 17.4 14.4 18.4 26.0 2.4 1990 -17.5 19.0 16.1 -15.1 8.7 1991 34.2 24.7 11.2 20.2 20.1 1992 -2.3 10.4 6.9 4.5 7.0 1993 45.4 16.3 5.4 24.4 30.1 1994 -8.7 -4.7 5.4 -8.1 -5.6 1995 20.2 18.6 8.0 25.9 12.7 1996 14.6 11.9 7.6 6.3 14.5 1997 12.2 12.2 5.6 41.1 20.3 1998 11.6 9.5 5.1 32.1 18.0 1999 16.1 -1.2 5.0 17.1 -5.0 2000 4.8 12.1 6.3 2.2 17.9 2001 10.5 5.5 5.2 -9.7 15.0 2002 -8.6 8.8 4.8 -27.2 11.9 2003 15.0 3.0 4.9 -0.5 8.8 Be sure to include in your responses to the questions above, these graphs and calculations: ? First, graph the efficient frontier. In order to do so you will need to determine the expected return [1], standard deviation and correlation of the 5 assets in your portfolio. ? Then, use Microsoft Excel to plot the efficient frontier on the XY scatter graph with risk on X axis and return on Y axis. ? Using your graph, discuss the concept of the Markowitz Portfolio Theory and the CAPM. Clearly show that, using a risk-free asset, you are able to obtain a higher return for a given risk. The data for this assignment is drawn from “Financial Markets and Institutions in Australia” by Tom Valentine, Guy Ford, Vic Edwards, Maike Sundmacher and Richard Copp , 2nd edn, Pearson Education Australia, 2006, pp. 92-93. – [1] Assume the expected return is equal to the average annual stock return (from 1983 to 2003). ? This assessment is an individual assessment (ie this is not a group assessment). Please ensure you avoid collusion and other practices which compromise individual assessment work. (Refer to the Academic Integrity Policy available on AIB website)